Time Horizon/Retirement Duration For Planning Purposes

[monabri]

Working longer as an insurance against longevity clearly works.
Billions of poor people the world over prove it.

For the early retirers, an inconvenient truth is that either you were worth what you were briefly paid and so withdrawing your efforts leaves the economy with less talent, or you ripped off the economy and have high tailed it off into the sunset. Both sub optimal for the economy, which you subsequently rely on to finance the duration of the non activity.

W.

I have primarily invested the fruits of my toils into overseas investments, so in fact my retirement will not be on the shoulders of UK workers but a substantial benefit for our economy from overseas economic activity.

My planning is based on living til 150. OK that is taking it a bit far but why not

Can't help but admire the ambition!

[SoBo65]

I am planning on the basis that one that at least one of us makes it to 90 and if we haven’t downsized our property by then, we will sell up and rent for the remainder. Our spending projections do step down from aged 75, long haul travel biz class being the biggest item to go. In reality we will probably downsize earlier which should provide a top up of financial assets. When looking at the various projections it is clear how valuable ISA’s are in generating tax free income, so we will ensure we move use our annual allowance by transferring from other holdings. My other assumptions include a 5% nominal return in financial asset return and 3% annual inflation with a spike every now and then.

[swill453]

I am planning on the basis that one that at least one of us makes it to 90 and if we haven’t downsized our property by then, we will sell up and rent for the remainder.

Bear in mind you will lose the property allowance for inheritance tax. That may not be important to you.

Scott.

[genou]

I am planning on the basis that one that at least one of us makes it to 90 and if we haven’t downsized our property by then, we will sell up and rent for the remainder.

Bear in mind you will lose the property allowance for inheritance tax. That may not be important to you.

Scott.

Not necessarily, and probably not, depending on who the heirs are.

https://www.gov.uk/guidance/how-downsiz ... -threshold

[Charlottesquare]

I suspect the error rate for not anticipating inflation correctly ,over say 25 years of retirement, or more ,will far exceed the error from getting the number of years wrong by say five extra.

Even at 4% compounding it only takes circa 18 years to be 100% out.

[CliffEdge]

I've never died before, as far as I'm aware.

[DrFfybes]

I've been reading this topic, thinking about replying on and off, but it is now cold and raning outside and the dog is happy by the fire, so ...

I think this approach is wrong. Whilst I appreciate that this is a common way of looking at things, it really is outside your control.

The first thing in planning for retirement is knowing your intended spend. You need that figure, because without that you cannot even begin to work out what you need.

Then you can look at things you can control - discretionary spend mainly, holidays, new cars, gifts to offspring, etc. - ie how much flexibility you have in what you spend.

You also need to factor in expected income - for most that will mainly be the State Pension, and how to fill that gap until it kicks in.

And lastly, your 'end of life' needs - for most that will be single person care home or in home care, but also be very aware that the vast majority of Care Home residents are in there pretty short term, anyone going in aged late 80s (which is when I'd expect to be in that position) is only going to need to fund it for 3 or 4 years, at which point sale of the flat/home you are in is likely to be an adequate source of funds.

Then there are things you cannot control
1) When you die.
2) Inflation.

I think at 50 it's impossible to know what you'll need after your 60th, 70th 80th birthdays. All forecasting 20+ years out seems pointless. Make a plan for the next decade and keep it under review.

This is probably the most sensilbe comment on the thread - you can spend days delving into scenarios,but all you are doing is sticking a finger in the air and making a guess. So don't - aim to have an income level that is manageable, or you are able to live within your income if things change.

Because once you start on target graphs with residual assets ramping down to an expected death date, this will start to govern your retirement and spoil the enjoyment, and in that case you may as well just keep working until you are sure you have enough, which will probably be a lot longer than you needed to

Consider your individual attitude to risk. If you like certainty, then get some. We have a couple of DB schemes that cover the bills, but that could be an annuity. In line with Kempiejon's thinking, I have a pot that I sell down each month roughly equivalent to the SP. that is intended to deplete. At the moment that looks like lasting longer than the 10 years to take me to SP age, but if things change I can trim discretionary spend. As it happens MrsF is still working Part Time, so I recycle £240/month back into a SIPP and we still have a surplus, but that ends in March, when MrsF's 'SP Infill' pot might come into play, although for a lot less than 10 years.

Back to the OP... a couple of observations.

I am modelling :

1. combined view (this is the simpler bit) which produces a sustainable drawdown amount flat across all assets
2. tax free with depletion (as I don't wish to outlive my tax free cash)
3. taxable income without depletion which must do all the preservation to leave money for dependents.

I will give some example withdrawal rates for the sake of discussion:

1. 3% targeting 50% residual value as a floor level but hoping for closer to 90+%
2. 4% tax free to depletion
3. 2% taxable targeting getting an overall residual value in line with 1.

I think you are looking at tax from the wrong angle, what's wrong with outliving your tax free cash?

It isn't clear how much unsheltered assets you have, but they should go first for 2 reasons...
1) reduces future tax burden, £1k taken from a sheltered holding can never be put back.
2) makes a tax return a lot simpler once you're 80

Historically 4% has proved a pretty safe withdrawal with capital reservation, 2% is nearer the Global dividend yield Of course all that can change, but that is what we're basing things at.

If you're taking 2% from a pot then you could just keep it as cash. I'd suggest a 'bad' scenario if you only get 1% return and you increase your take by inflation at 5%, it will last you 30 years. increase the return to 1.5%, or drop inflation to 4%, and you're well into your 80s before it runs out. Then for the 3-4% return just pick VHYL and take the Divi, because if the whole World economy tanks then that's something no model can account for.

Anyway, the sun is out nd the dog is suggesting I've sat here long enough, so I'm off out for a short but leisurely stroll where I absolutely won't be thinking about SWRs. Well, probably not anyway

Paul

[Hariseldon58]

My view would be to go with a prudent drawdown rate , for a portfolio with an equity bias, 4% is probably as good any, then review periodically.

With a Mathematics university education I have a bias to complication and fancy spreadsheets but interesting as they are, events occur and they are poor predictor's of the future, adapt as you go.

Father with a history of poor health for his 40's onward died at 99... (mother still going, with assistance at 97), not what would have been considered likely. Until recently their expenditure was low and had been pretty level for around the last 15 years, it fell heavily when they hit their 80's.

I retired late 40's in 2007 on a 4% rule , the 2008/2009 financial crisis came as rude shock, I hadn't planned for that but of course knew that financial crisis occur and I would likely see several but it still came as surprise how quickly it developed...

Adapt to what happens, it all works out, avoid expensive long term financial commitments, flexibility is key.

Portfolio values do not rise steadily at 5% each year.

5 years to recover in inflation adjusted terms after the first major fall (approaching 50% ouch !), 10 years out of 16 have been below a previous high in inflation adjusted terms.

Expenditure has been as low as 2% (health issues prevented travelling) and much closer to 3+% of late because of extensive long haul travelling for 4+ months each year.

If we pulled back, expenditure could be as low as 1.5%

When I was 50 I planned on 40 years, at 65 I do not plan on a finite term, I do plan on lifestyle expenditure falling from mid 80's on, if I live that long and rising at some point...

Whatever happens, you will adapt, if you're thinking about it now then you are very likely to be able to cope.

If I had kept to the original 4% drawdown , index linked to CPI 00, the drawdown would be around 2% of the present portfolio value.

[MrFoolish]

Are those of you taking a drawdown having to perform regular mental gymnastics over what to sell? As I look ahead to my retirement, this is probably the aspect that concerns me most. I've been a net buyer of stocks up to this point so I suspect the change is going to be like driving everywhere in reverse gear.

[Lootman]

Are those of you taking a drawdown having to perform regular mental gymnastics over what to sell? As I look ahead to my retirement, this is probably the aspect that concerns me most. I've been a net buyer of stocks up to this point so I suspect the change is going to be like driving everywhere in reverse gear.

You might think that. But I retired 25 years ago, in my 40s. And since then have lived off my investments. But even so my net worth is now probably 3 times what it was when I retired. So I have continued to be a net buyer. I accept however that I might have been lucky with my timing, plus my wife still works and makes good money.

[MrFoolish]

I'm some years off retirement age and I could probably live off the combined dividends from my SIPP and ISA. But it seems tax inefficient to me... cos eventually a DB pension and my state pension will kick in - so I guess I want to run down the SIPP before then. So selling shares in the SIPP sounds like the way to go. Am I missing a trick?

[xxd09]

What I have done over the last 20 years of retirement (now78)
Have an Asset Allocation set that I can live with through thick and thin
Drawdown once a year to replenish 2-3 years living expenses cash saving pot
Sell units of funds to get amount required but maintain Asset Allocation (have 3 index funds only so simple)
Sometimes equities,sometimes bonds ,sometimes a bit of both-in practice been mostly equities as you would expect
Seems to work -so far!
xxd09

[Charlottesquare]

People used to pay us about 5k for a course on how to make their money work efficiently at and after retirement, and despite it being valued, we eventually stopped and are looking to hand it all over to a university for mature students. Anyway, point is I should be expert in this question.

Having said that, there is huge reason to applaud everybody here taking their own lines. I've been so used to aggressive disengagement in this area that it is a relief to see there's another side.

I can't quite tell after a careful reading of the comments above, but I don't think anybody seems to be computing ranges of outcomes. This is the single most consistent error our clients make when they do their own thing. You want to account for sequence risk because that can really bite you in the backside. You may choose to look at the income of the household with one person in a couple dying well before another. You may want to factor in actuarial tables and compute 1000 scenarios a time and let the model randomly (within the actuarially defined chance of dying) so that you get a range of outcomes.

Let's see, you need excel functions for random() and the probability standard deviation. A lot simpler in practice than it sounds, it's usually one formula range for each type of variance you want to account for.

As regards future tax rates, I think SoBo65 is right on but it does trouble me we cannot factor in the chance that the tax law on ISA income will change. We can make guesses about how the State pension will decline, though. We can guess the likely range of LTC costs.

Charlottesquare is also dead on, regarding inflation, but I wonder if it is possible we are being too 'blocky' with our thinking. After all, a model is used here as a testbed, not a forecast? If we adjust variables in the testbed and run it again, we can find those changes that optimise each individual decision - such as risk, spend level, choice of annuity, use of tax favoured account etc. So an error in inflation would kill a forecast but it might not change the finding of the optimal decision point.

I hope this doesn't come across as anything other than relief and praise someone out there is interested in something as important as health care (in my view).

The death of one before the other can certainly have repercussions.

In under three years we both get our state pensions, if one of us then goes that is a drop of one state pension, if I go then because I have a SIPP wife inherits it in total, no reduction, but if wife goes I then only get 50% of her local authority pension scheme (Albeit with some indexation), so when working out what we have, what we need etc care does need taken re this which is why our planned starting requirement in retirement is circa 50k pa for us as a couple (this may be perceived as too high by some) but it allows for the drops that will come (circa £12,500 for each re state pension plus 50% of wife's pension)